Since remote antiquity the essential importance of energy to human civilization has been well appreciated: in ancient Greek mythology for example, it was the secret of fire that the Titan Prometheus stole from the gods and gifted to mankind. Today the still increasing energy needs of humanity are greater and more diverse than ever before. And in this energy tale, shipping of course plays a titanic role…

By the late 1800s, the shipping industry had been transformed by the introduction of steam power and iron ships. Coal and grain were two of the most important cargoes, alongside timber, sugar, cotton and tea. While technology, the sheer scale of the business, and the global cargo mix, have of course all changed since then, dry bulk cargoes have retained a position at the heart of global seaborne trade.

Price ratios are a classic indicator used in a range of industries where assets depreciate over time. In the shipping sector, they can often tell us something about the perceived health of the market, and in particular about what investors are really willing to outlay to get their hands on assets that are on the water today compared to investing in a new vessel.

A Classic Ratio

One classic shipping market indicator is the ratio of the 5 year old price of a ship to the newbuild price of a similar vessel. On the basis of a 25 year lifespan, a 5 year old ship, depreciating on an even basis, would be worth around 80% of the newbuild price. However, if investors feel that the market is strong enough, they may be willing to pay a premium to get their hands on a secondhand vessel to operate in the market today. Conversely, if the earnings environment looks weak, investors may take a more negative view of the value of the existing asset.

The graph shows the 5yo/Newbuild price ratio for a VLCC tanker, a Panamax bulkcarrier and a 2750 TEU containership over time. Immediately apparent is that during the boom shipping market of the mid to late 2000s, the featured ratios stood well above the 80% line, and at times above 100% for all three vessel types, with the Panamax bulker ratio as high as 170% in late 2007. Since the downturn in 2008, the ratios have fallen. From one angle, it could have been worse; there was a period when all three ratios exceeded 80% (Mar 10-Jun 11). However, in general the ratios have been depressed, and there have been clear phases (Oct 08-Mar 09, Aug 12-Apr 13) when they have all been below 80%.

Ups And Downs

So what do the ratios tell us today? Tanker earnings have had a strong run since late 2014 but even so the VLCC price ratio stands only a little above 80%, maybe indicating that investor positivity is mixed with caution. Meanwhile, the bulker market is in severe recession and the Panamax price ratio has fallen from 95% during 2014 to 65%, showing how investors’ optimism has drained.

Lower Levels

The containership ratio, however, is on the up, with earnings recently improved. But it still stands at just 54%, perhaps indicating investors’ caution and relative preference for new tonnage. At boxships’ higher speeds, the difference in fuel efficiency between new and older tonnage is more marked, though the ratio was higher in the 2010-11 period when fresh interest arose in a sector that ‘looked cheap’.
Reading The Classics

So, price ratios are classic indicators, and as if it needed emphasising, today’s ratios show that the shipping markets aren’t perceived by investors to be close to full health yet. Overall sale and purchase volumes in the year to date are a little way behind last year’s levels, and the price ratios today might give an indication as to investors’ actual feelings about assets on the water. But markets change quickly, so just like classic cars which get taken out once in a while, it’s the same for classic indicators – and market watchers should probably take another reading soon. Have a nice day.